Regulation

The regulatory environment continues to be a contexture of legislative acts and evolving action related to market practices.

What are the regulatory issues that are keeping you up at night? Whatever they might be, there's a good chance that we have the insights to help you understand them and the people to help you adjust and even thrive. Let us know what's on your mind. We'll let you know how we can help.

Derivatives

BNY Mellon's Jim Malgieri, Head of Service Delivery and Regions, Global Collateral Services and James Slater, Head of Securities Finance, Global Collateral Services, discuss how institutions are navigating new regulations, market dynamics, demand for high-quality collateral and a heightened focus on risk.

The required execution of interest rate swaps through CFTC-certified Swaps Execution Facilities (SEFs) or Designated Contract Markets (DCMs) commenced on February 15, 2014. The establishment of SEFs and DCMs as regulated platforms for swaps trading is based upon Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act").

On 13 February 2014, the European Commission (EC) adopted the regulatory technical standards (RTS) without amendment, as proposed by the European Securities and Markets Authority (ESMA) for derivative transactions by non-European Union (EU) counterparties. The RTS cover derivatives transactions concluded without business substance or economic justification that can be used to circumvent EMIR's requirement for clearing and risk mitigation.

On 20 December 2013, the European Securities and Markets Authority (ESMA) published revised Questions and Answers (Q&As) on the implementation of the European Markets Infrastructure Regulation (EMIR) including how exchange traded derivatives (ETD) should be reported. From 12 February 2014, all European Union (EU) counterparties to a derivatives contract will have to report their trades to a trade repository, irrespective of whether these are traded on or off exchange.

On 18 November 2013, the European Securities and Markets Authority (ESMA) published a final draft of regulatory technical standards (RTS) for derivative transactions by non-European Union (EU) counterparties. The RTS implements provisions relating to OTC derivatives, central counterparties and trade repositories under the European Market Infrastructure Regulation (EMIR).

On September 2, 2013, the Basel Committee for Banking Supervision and the International Organization of Securities Commissions (IOSCO) issued their final framework for margin requirements in the settlement of non-centrally cleared derivatives.

Title VII of the Dodd Frank Act (DFA), requires mandatory clearing for over-the-counter (OTC) Derivatives for Interest Rate Swaps (IRS) and Credit Default Swap (CDS). The U.S. Commodities and Futures Trading Commission (CFTC) Category 3 legislation, will require clearing for entities where one counterparty is an Employee Retirement Income Security Act (ERISA) pensions/ plans, third party sub-accounts (accounts managed by Investment managers) or any other entity that trades/ clears IRS and CDS effective September 9th.

On 11 July 2013, the European Commission (EC) and the Commodity Futures Trading Commission (CFTC) announced that they have reached a mutual understanding ("Path Forward") on the approach to address market participants' concerns on cross-border regulation of over-the-counter derivatives.

On May 1, 2013 the Securities and Exchange Commission (SEC) unanimously voted to issue a proposal that includes rules and interpretive guidance for cross-border security-based swaps regulation. The proposed rule is pursuant to the requirements set forth for over-the-counter derivatives regulation in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Fund Operations

In December 2013, BNY Mellon conducted the second in a series of surveys amongst alternative fund managers to take stock of the industry's preparedness to implement the AIFMD. Our research report looks at how the industry is addressing the AIFMD's data and monitoring requirements, challenges, cost of compliance, how risk management solutions are developing, and how far down the line the industry is in preparing for authorization

On 17 February 2014, the European Securities and Markets Authority (ESMA) released a set of questions and answers (Q&A) on the application of the Alternative Investment Fund Managers Directive (AIFMD). The Q&A document aimed at competent authorities, seeks to promote a common supervisory approach and practice in the application and implementation of AIFMD.

On 20 December 2013, the European Securities and Markets Authority (ESMA) issued a consultation paper with the aim of seeking views on the merits of revising the provisions on diversification of collateral in its guidelines on exchange traded funds (ETFs) and other Undertaking for Collective Investment in Transferable Securities (UCITS) issues. ESMA will take into account responses when finalizing the guidelines on the diversification of collateral received by UCITS in the context of efficient portfolio management techniques and OTC transactions to be adopted in Q1 2014.

On 18 November 2013, the European Securities and Markets Authority (ESMA) published a Review of the comparability and quality of disclosures in 2012 International Financial Reporting Standards (IFRS) financial statements of listed financial institutions. ESMA identified broad variations in the quality of the information provided and found cases where it was insufficient or insufficiently structured to allow comparability among financial institutions.

On 1 October 2013, the European Securities and Markets Authority (ESMA) published final guidelines and opinions in relation to the reporting obligations for alternative investment fund managers (AIFMs). In its Opinion, ESMA proposes additional standardised periodic reporting on an alternative investment fund's (AIF) risk profile over and above that provided for in the regulation.

On 3 July 2013, the European Parliament (EP) rejected some of the remuneration proposals put forward by the Economic and Monetary Affairs Committee (ECON). The European Union proposals under UCITSV were intended to ensure sound risk management and that decisions made by senior management or those who had a material impact on the fund were consistent with the UCITS's risk profile.

On July 18, 2013, the European Securities and Markets Authority (ESMA) Board of Supervisors announced the finalization of additional cooperation arrangements, also known as Memoranda of Understanding (MoUs), between EU securities regulators and Non-EU authorities for securities markets supervision.

On 26 June 2013, the European Commission (the "Commission") published a proposal for the regulation on European long-term investment funds. The proposed European Long-Term Investment Fund ("ELTIF") is designed for investors looking for long-term investment opportunities in companies or infrastructure projects.

On 22 May 2013, the European Securities and Markets Authority (ESMA) approved co-operation arrangements between European Union (EU) securities regulators that are responsible for the supervision of alternative investment funds (AIFs) (including hedge funds, private equity and real estate funds), and 34 regulators in other countries. The rules of the Alternative Investment Fund Managers Directive (AIFMD) apply to non-EU alternative investment fund managers (AIFMs) that manage or market AIFs in the EU, and to EU AIFMs that manage or market AIFs in third countries.

The European Securities and Markets Authority (ESMA) released its draft regulatory technical standards (RTS) to determine types of alternative investment fund managers (AIFMs), where relevant in the application of the AIFM Directive.

The AIFM Directive introduces harmonized rules for managers of alternative investment funds that are sold to EU investors. The Madoff fraud, the Lehman experience (impacting hedge funds) and the political desire to create more transparency around hedge funds and private equity funds were immediate catalysts for this new directive. This paper outlines the Directive, examines the impact on the fund value chain and the deepening manager — service provider relationship, reviews the increased depositary duties and liabilities as well as the new hedge fund - prime broker depositary models.

The Markets in Financial Instruments Directive became a core pillar in the European Union financial markets regulatory system when it was implemented on 1 November 2007. The Directive's main objectives were to increase competition, improve investor protection and, combined with other Directives, help create a single market for financial services and activities in the EU. The key measures implemented through the directive were: best execution and order-handling practices, categorization of clients, investment research, conflicts of interest, outsourcing, transaction reporting, pre- and post-trade transparency and regulation of trade-related market infrastructure. The objective of this paper is to provide BNY Mellon's perspective on the impacts of changes to The Markets in Financial Instruments Directive as proposed in a package of amendments and a regulation currently under consideration by the European Parliament and the European Council.

Financial Stability

On 15 November 2013, European Securities and Markets Authority (ESMA) published a risk dashboard covering risk issues in the capital markets through third quarter of 2013. The risk dashboard monitors as well as assesses market developments and features liquidity, market, contagion and credit risks including economic and securities landscape.

The G-20, the Financial Stability Board (the FSB) and the European Commission (the Commission) have outlined their respective overall approach to strengthen oversight and regulation of shadow banking. The stated purpose for each body was to enhance supervision and impose stricter regulation in areas where risk and regulatory arbitrage concerns are inadequately addressed.

Global Investing

The International Organization of Securities Commissions (IOSCO) has issued a set of guiding standards entitled "Principles of Liquidity Risk Management for Collective Investment Schemes". The consultation report (Consultation) outlines 15 practical principles by which the industry and regulators can assess the quality of their practices for Collective Investment Schemes (CIS) liquidity risk management. The principles will apply to the entity responsible for operating CISs.

On 24 June 2013, the International Organization for the Securities Commissions (IOSCO) released a final report (the Report) on the Principles for the Regulation of Exchange Traded Funds (ETFs). The principles address ETFs that are organized as Collective Investment Schemes (CIS) and do not apply to other, non-CIS, exchange-traded products (ETPs).

Insurance

Regulators' response to the financial crisis is now moving into the implementation phase, with changes to collateral requirements coming in under the Dodd-Frank Act in the U.S. and the European Market Infrastructure Regulation in Europe. Reactions held a roundtable of collateral specialists in association with BNY Mellon to ask how insurers will be affected.

On 27 September 2013, the European Insurance and Occupational Pensions Authority (EIOPA), following consultation with stakeholders, published its final guidelines for the preparation for Solvency II (the Guidelines). The Guidelines aim to ensure that National Competent Authorities (NCAs), insurance companies and insurance groups take active steps towards implementing certain key elements of Solvency II in a consistent and convergent way.

The European Insurance and Occupational Pensions Authority (EIOPA) released a consultation in relation to the Supervisory Reporting and Public Disclosure in the Solvency II framework. This Consultation Paper is being issued in the frame of the development by EIOPA of the measures which should facilitate the convergent implementation of Solvency II.

Investor Protection

During the month of October, several regulatory agencies in the U.S. and EMEA issued consultation papers, proposed rules and requests for comment for crowdfunding. In both regions, this refers to the practice of soliciting funds for business ventures from a crowd through the Internet.

The European Commission published a review of the Investor Compensation Scheme Directive (ISCD), which aims to extend the scope of compensation under the ICSD, reduce the gaps in the regulatory system, reduce the disparities between the protection of clients of investment firms and of bank depositors and create common rules to harmonize the funding of the schemes and their day-to-day operations.

Money Market Reform

Regulatory reforms for money market funds have been central to the activities of regulators in the U.S. and Europe for several years, following the 2008 financial crisis. The reform efforts of regulators have been chiefly focused on systemic risk mitigation in the form of enhanced prudential oversight and control for systemic risks in the financial marketplace.

Taxation

Elisabeth Martinetz, tax director for BNY Mellon Asset Servicing's U.S. Funds Services group, discusses the status of the Regulated Investment Company (RIC) Modernization Act and its impact on the mutual fund industry. This article was first published in The 2013 Mutual Fund Service Guide, June 2013.

In November 2013, the U.S. Department of the Treasury ("the Treasury") revised the filing requirements for Treasury International Capital Form B ("TIC B"), used to report information on cross-border claims and liabilities.

On 6 November 2013 the UK and the Cayman Islands signed an Intergovernmental Agreement (IGA) for the mutual exchange of tax information to improve international tax compliance. This agreement is in support of the 2010 Double Taxation Agreement (DTA) between the UK and the Cayman Islands to avoid double taxation and to prevent fiscal evasion. The DTA also authorizes the exchange of tax information on an automatic basis.

The year 2008 was arguably a turning point for the financial services sector. In Europe, a common political reaction to the financial crisis was that the financial sector should be held accountable and made to contribute financially to the costs of fixing the economic problems it was said to have helped cause. European Union (EU) legislators were tasked to create an environment in which the financial sector would contribute more fairly to the costs of the crisis and thus address the perceived fiscal imbalance in Europe.

On July 12, 2013, the Internal Revenue Service (IRS) issued IRS Notice 2013-43, Revised Timeline and Other Guidance Regarding the Implementation of the Foreign Account Tax Compliance Act (FATCA). At this time the IRS announced that the FATCA registration portal will open on August 19, 2013, along with a six-month delay — to June 30, 2014 — for the commencement of FATCA withholding payments.

On January 17, 2013 the U.S Department of Treasury (Treasury) and Internal Revenue Service (IRS) released the final regulations for the Foreign Account Tax Compliance Act (FATCA). With the publication of the final regulations those impacted by FATCA can now move closer to implementing their own FATCA compliance regimes.

Despite a recent publication by a Treasury Official, the Inland Revenue Services (IRS) did not issue its proposed rules on Foreign Account Tax Compliance (FATCA) at the end of January as originally planned. According to sources at the Treasury Department, the government is drafting proposals for a regulation. FATCA guidance is intended to implement a statute that requires foreign banks to report their U.S.-owned accounts to the IRS or face, in some cases a 30 percent withholding tax.

The U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have approved final rules Requiring Registered Investment Advisers to Private Funds and Certain Commodity Pool Operators (CPOs) and Commodity Trading Advisors (CTAs) and have jointly established the form and content to be included in Form PF filings.

The proposals adopted by the European Commission seek to clarify the role of the auditors and introducing more stringent rules for the audit sector aimed in particular at strengthening the independence of auditors as well as greater diversity into the current highly concentrated audit market.

On January 13, 2014, the Securities and Exchange Commission (SEC) issued a Temporary Stay on its Final Rules for municipal advisor registration. The aforesaid stay provides municipal advisors with additional time — until July 1, 2014 — to comply with the SEC registration requirements set forth by Section 975 of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act").

On April 4, 2013, the Federal Reserve Board of Governors (The Federal Reserve) adopted "Regulation NN" which enables U.S. financial institutions to enter into foreign exchange transactions with retail customers.

On April 10, 2013 the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) issued a joint final rule requiring entities under their jurisdiction and managing covered accounts to adopt and administer identity theft red flag programs. This final rule includes, but it not limited to investment advisers, broker dealers, mutual funds, futures commission merchants and swap dealers. The SEC and CFTC finalized this rule in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Retirement Plans

The Principles for Investment Governance of Defined Contribution ("DC") work-based pension schemes are intended to encourage better investment governance and decision making by all stakeholders (trustees, employers, advisers, pensions providers and members). The DC Principles provide a framework and a practical checklist to benchmark a scheme's investment governance processes against 'best practice' agreed by stakeholder representatives within the Investment Governance Group (IGG). They reflect the growing importance of DC provision and show that good governance is essential to ensure a pension scheme runs well.

Starting June 28, 2013, the IRS will begin to accept requests for opinion letters and advisory letters in which they will determine whether the form of a §403(b) prototype plan or §403(b) volume submitter plan meets the requirements of §403(b).

On February 7, 2013 the Department of Labor (DOL) issued an Advisory Opinion to clarify whether a swaps Clearing Member (CM) or Central Counterparty (CCP) in a swaps transaction involving an employee benefit plan meet the definition of a "fiduciary" subject to requirements set forth Employee Retirement Income Security Act (ERISA) of 1974.

In February 2013, the U.S. Department of Labor (DOL) Employee Benefits Security Administration issued general guidance to assist plan fiduciaries in selecting and monitoring target date funds (TDFs) and other investment options in 401(k) and similar participant-directed individual account plans.

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